Store Giveshungary A Lesson In Business

February 05, 1986|By New York Times News Service.

BUDAPEST, HUNGARY — It is 7:30 p.m. one recent Thursday, late shopping night in Budapest. Downtown in the state-owned Corvin and Centrum department stores, customers pick quietly at racks of dowdy clothes, mostly from Hungary and other Eastern bloc countries.

But just a short tram ride away, there is another world.

In a flashy chrome and glass complex, Beach Boys music thumps in the background as shoppers eye West German sportswear, Japanese stereos and Italian shoes.

Shopping carts jam the downstairs supermarket, where household appliances, imported fruit and fresh juice stand out on the shelves.

This is Skala Metro, part of Skala Co-op, a 66-store group that overtook the state-owned Centrum chain to become Hungary`s largest retail organization last year. Founded 13 years ago, Skala Co-op provided the first competitive challenge to dreary state-owned department stores--not only in Hungary, but in any socialist country, according to its flamboyant director, Sandor Demjan.

Now, with sales of $570 million a year and international aspirations, it is a testament to the success of Western business methods in the East.

Hungary`s consumer cooperative movement created Skala only five years after Communist Party General Secretary Janos Kadar began his widely publicized reforms to encourage competition to improve the country`s economy. Consumer cooperatives are associations of individuals who pool their money to create small production and retail units.

Demjan, now 43, was managing a cooperative when the movement`s leaders asked him to run a new department store to challenge state-owned outlets in the capital.

``When we started, I told my people either we take risks or we closed,``

Demjan declared. ``We had to establish an aggressive competitive situation that until that time was unimaginable in socialist conditions.``

With 600 million forints (about $12 million) from 200 consumer cooperatives, Demjan`s team opened in 1976 what he said was Hungary`s first air-conditioned department store, the first to offer such services as hairdressing and dry cleaning, the first to offer special sales promotions and, most important, the first to reject the giant state wholesale

organization, where retailers jointly decided who would sell how much of what. Instead, Skala went straight to the producers, setting up its own wholesale organization, arranging exclusive contracts with some factories, exchanging items with department stores in other socialist countries and eventually negotiating deals with West European suppliers.

To get good help, Demjan paid his employees 25 percent more than the average state wage, hired young people who wanted to work and discharged those who did not. Employees receive a premium based on performance, too.

Within a year after opening, the first Skala department store recorded twice the average sales per square foot than its state competitors, Demjan said. Within three years, the group began building new outlets and adapting old stores owned by consumer cooperatives to form a network. Now it is expanding into production, buying defunct factories and turning them around to make goods at lower cost.

Last year it created Skala World Trade, which aims for $300 million to $500 million in revenues by 1990, and after three tries it won an unusually liberal foreign trade license from the foreign trade ministry.

``We asked the ministry to regulate what we cannot do--not to regulate what we are allowed to do,`` explained Mihaly Muszbek, 31, Skala`s financial director and Demjan`s right-hand man.

As a cooperatively owned group, Skala Co-op is structured differently from its state-owned competition. Two hundred consumer cooperatives have invested in the group and get a share of the annual profits based on the size of their investments, Muszbek explained.

To raise about $10 million in extra capital, Skala in 1984 issued bonds on Hungary`s fledgling market, located in one room inside Budapest`s State Development Bank. Both state and cooperative enterprises own the bonds and receive interest payments every year. But the bonds cannot be traded, and Skala is lobbying for a true bond market and even a stock exchange, so it can raise further equity, Muszbek said.

For the future, Demjan dreams of linking up with Western stores.

Muszbek said he is talking to a Swiss stores group, which may offer Skala an equity stake in exchange for a stake in Skala Metro. He declined to name the group.

Skala also sent a team to the United States to talk about possible trade deals with Sears, Roebuck & Co. and K mart Corp.

As Muszbek put it, Skala sees ``a real chance to open a K mart department store in Hungary,`` as a joint venture under K mart`s name.

Though K mart already sells some Hungarian goods, the company sees no prospect for opening a store in Hungary, said Norman G. Milley, K mart Stores Group president, in a telephone interview. ``It`s an Iron Curtain country,``

he said. ``It operates under a totally different system. It`s a very complicated process`` to do business there.

A spokesman for Sears World Trade said it was not interested in trade deals with Skala.

But Demjan has managed to get his way before. Much of Skala`s success has come from his persistence and skill in turning Hungary`s economic climate to the group`s advantage.